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Function-Coherent Gambles with Non-Additive Sequential Dynamics

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  • Gregory Wheeler

Abstract

The desirable gambles framework provides a rigorous foundation for imprecise probability theory but relies heavily on linear utility via its coherence axioms. In our related work, we introduced function-coherent gambles to accommodate non-linear utility. However, when repeated gambles are played over time -- especially in intertemporal choice where rewards compound multiplicatively -- the standard additive combination axiom fails to capture the appropriate long-run evaluation. In this paper we extend the framework by relaxing the additive combination axiom and introducing a nonlinear combination operator that effectively aggregates repeated gambles in the log-domain. This operator preserves the time-average (geometric) growth rate and addresses the ergodicity problem. We prove the key algebraic properties of the operator, discuss its impact on coherence, risk assessment, and representation, and provide a series of illustrative examples. Our approach bridges the gap between expectation values and time averages and unifies normative theory with empirically observed non-stationary reward dynamics.

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  • Gregory Wheeler, 2025. "Function-Coherent Gambles with Non-Additive Sequential Dynamics," Papers 2503.02889, arXiv.org.
  • Handle: RePEc:arx:papers:2503.02889
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    References listed on IDEAS

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    4. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
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